The government was facing the threat of legal action last night from the US billionaire behind the redevelopment of the Millennium Dome after Manchester's victory in the race to create Britain's first supercasino. Speculation mounted throughout the day that Philip Anschutz would challenge the decision of the Casino Advisory Panel to reject the Greenwich bid.

Though the tycoon will press ahead with phase one of plans to build Europe's largest entertainment complex at the dome, he faces problems about the viability of the project, which will include a concert venue, bars and cinemas. As they sought to persuade the Casino Advisory Panel of the merits of the bid, officials from south London highlighted a report from the National Audit Office which said the arena alone could not "generate a fully commercial return for the operator". Another analysis by PriceWaterhouseCooper suggested that the development without the casino and accompanying hotels could take so long to become profitable that the project would be imperilled.

Yesterday David Campbell, president and chief executive of Mr Anschutz's company, AEG Europe, said: "We are very disappointed that the London borough of Greenwich has not been recommended as the location for the first regional casino. We are taking time to examine the findings in full and are considering our position."

One issue could be the effect of John Prescott's admission that he spent time at Mr Anschutz's Colorado ranch and accepted gifts from the billionaire.

Yesterday some in Greenwich said the furore which followed the deputy prime minister's admission may have damaged London's case. The result will also have provoked gloom elsewhere. The Guardian has learned that Rupert Murdoch's News Corp holds a 10% interest in AEG's dome development subsidiary.

Though yesterday's announcement sparked jubilation in the 17 towns and cities selected as locations for the first wave of regional, large and small casinos, the culture secretary, Tessa Jowell, was again compelled to try to take the heat out of an increasingly contentious issue.

Ms Jowell offered MPs a vote on the recommendation and promised that no more casinos would be approved before the next general election. She also promised tough restrictions - "the strictest in the world" - on how the casinos would operate. "Las Vegas is not coming to Great Britain," she said. She said it would be illegal to take children into gambling areas and that other ruses seen abroad - such as offering gamblers free drinks or adjusting the casino air flow to keep clients gambling - would be outlawed. All staff would be trained to spot problem gamblers.

A source close to Ms Jowell said she was surprised at the decision of the panel, chaired by Stephen Crow, to select Manchester but was nevertheless "very impressed by the persuasive arguments put forward". Sir Howard Bernstein, chief executive of Manchester city council, said: "This will bring massive investment to Manchester, creating much-needed jobs and training opportunities in the catering, hospitality and leisure industries." Sir Howard said bids would be requested for a contract to build and operate the supercasino. Operators would likely sign a 250-year lease with the city council, which owns the land, he said.

Kerzner International, a Bahamas-based gaming group owned by South African billionaire Sol Kerzner, was expected to show interest and had previously won a £260m contract to build a small casino at the site, Sir Howard said.

But there was shock in Blackpool, where officials had warned of the need for a supercasino to arrest the resort's decline. Alan Cavill, the head of corporate policy, said officials would lobby MPs to challenge the recommendation after the advisory panel's conclusion that not even a supercasino could turn round the town's fortunes.

The Tory culture spokesman, Hugo Swire, called the announcement "the latest chapter in a sorry story of this government's seeming addiction to gambling".